2018 Global Outlook: World trade

China’s expansion strategy is the most pressing issue for world trade in 2018 (source: dpa)

One year ago, world trade analysts were worried. They feared that Donald Trump’s populist rhetoric would soon translate into an unstoppable drift toward protectionism: rising tariff and nontariff barriers and a wave of intricate bilateral deals, in which political expedience and myopic drumbeating would prevail over economic common sense. If that had happened, the world would have been poorer and tensions would have been ubiquitous. In fact, President Trump has been much wiser than anticipated, and alarm about worldwide trade wars evaporated.

Moreover, many observers had predicted a drastic slowdown in China’s economy, which might have triggered import restrictions in Beijing and ominous ripples around the world. Nothing of the sort happened. Although the sustainability of Chinese growth continues to concern many operators, we are unlikely to witness a crash in 2018, and China will not change tack and turn protectionist.

In short, the uncertainties that characterized 2017 will no longer accompany us in 2018. Trade remains a crucial driver of global economic growth and trade policies remain high on all governments’ agendas. This suggests that world trade is posed for a reassuringly placid year. Trade volumes expanded by about 3.5 percent in 2017, and this pace may well pick up in 2018.

Chinese challenge

That said, the world of trade is not short of potential problems. From a broad geopolitical standpoint, the most prominent issue is surely China’s trade strategy. This will provide plenty of food for thought to the U.S. and many Asian countries, where leaders are scrambling to maintain the current geopolitical balance and devise appropriate responses to any threat of destabilization.

The international community will certainly be keeping an eye on the Belt and Road Initiative (BRI), which China launched in 2013. This mammoth infrastructure program for Eurasia envisions some $2 trillion in investments over the next 10 years, with more resources to follow before the initiative runs its course in 2049.

The Belt and Road Initiative concentrates on Asia – the world’s fastest-growing region in terms of output and trade

While the BRI reaches past the Suez Canal as far as Spain and Central Europe, its key elements are concentrated in Asia – currently the world’s fastest-growing region in terms of economic output and trade. The vast resources required for this project follow very significant investments already made by China in many developing countries over the past decade, and they are bound to turn the Chinese-funded Asian Infrastructure Investment Bank (AIIB) into a powerful global player.

In principle, the BRI is designed to lower transportation and storage costs, making trade throughout the Eurasian land mass cheaper and easier. In practice, the international community fears that the BRI and the AIIB are vehicles that will allow China to exploit its growing role in world trade to expand its economic and political influence. The difficulty is not expanding trade flows per se. Instead, the world community is worried that massive infrastructural development led by one country (China) might give that country an unacceptable level of political control over a large trading area.

Getting along

In this light, it is apparent that the West and possibly Russia must ponder the kind of response they are ready to offer. Time is not on their side, since they must act before the Asian countries make long-term commitments for want of better alternatives. There are no shortcuts; options are limited; and regardless of its choice, the West will be paying a price for previous lethargy and myopia.

Under one scenario, the U.S. and Europe could accept Chinese leadership and put significant funds into the AIIB. Such participation would at once show Western interest in the Asian continent and set some internal constraints on Chinese domination. This move would probably please many Asian countries, including India and Indonesia, whose economic weight is on the rise and who feel less than comfortable with the Chinese preponderance.

China’s bid for economic dominance in Asia is buttressed by infrastructure projects like the Ejina-Hami Railway, which shaves 800 kilometers off travel distances to Xingjiang and Kazakhstan (source: dpa)

The flip side of this coin is that the Chinese government has access to plenty of ammunition (foreign currency reserves) to keep its dominant position within AIIB. Moreover, it can deploy this firepower without getting bogged down in endless parliamentary debates, which it can use to sell itself as a more credible partner for long-term ventures than the Western bloc.

China could also react to Western involvement by presenting selected Asian countries with a choice: enter a vague understanding with the West or get an exclusive (and privileged) deal with Beijing. It is not obvious that Asia would align with the West, particularly if its offer remains ambiguous and unresolved.

Path not taken

A second scenario for Western decision-makers is to forget about joint infrastructure projects and plunge into unilateral, unfettered free trade. This would involve eliminating most nontariff barriers (quotas, subsidies and regulatory protectionism) and cutting corporate taxation, with a view to attracting foreign investors. In the European Union, this would mean scrapping the Common Agricultural Policy, which still absorbs over one third of the EU annual budget. It would also involve no more complaining about unfair competition whenever a country makes its tax regime less oppressive.

Unilaterally introducing free trade is an option neither the EU nor the U.S. seems willing to consider

Is this scenario plausible? While unilaterally introducing free trade would create huge economic opportunities and possibly reset geopolitical conditions in Asia and elsewhere, neither the EU nor the U.S. seems willing to consider this option. The demise of the Trans-Pacific Partnership and the shaky first steps of its lame substitute (the so-called Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP) do not bode well.

For the moment, the West seems content to adopt a wait-and-see approach, taking short-term profits from business opportunities that Asian growth creates while falling further behind the Chinese.

Deceptive calm

Lack of vision will characterize the North American scene this year, as squabbling about NAFTA preoccupies the current U.S. administration with a problem of its own making. The proposal to introduce a sunset clause to the treaty – causing it to expire every five years, unless it is renegotiated – would have particularly deadly consequences. It will be interesting to see whether President Trump is sensible enough to walk back a proposal that will increase uncertainty, scare investors and perhaps encourage export-oriented businesses to strengthen ties with Asia.

Not much will change in 2018 from Europe's perspective. As mentioned earlier, trade is no longer a matter of simply exchanging goods and services. Its promotion also requires a suitable environment for foreign investment, which includes a clear political vision. Grand alliances are not necessary; more important are predictability, rejecting populism and a credible commitment to resist special interests.

The U.S. may be tempted to use the world trade setting to show its muscle

We believe that populism will be less intrusive in Europe this year than in the recent past. Satisfactory growth and declining rates of unemployment (with some exceptions) have weakened anti-euro and anti-EU sentiment, which should help the Union authorities improve their free trade record. While the change of attitude is welcome, more will be required to transform the European Commission into a proactive leader in global policymaking.

Meanwhile, China will keep rolling ahead. Its trade policy will be focused on Asia, where it will do its best to appear moderate and cooperative. By contrast, the U.S. may still be tempted to use the world trade setting to show its muscle, even as it refrains from deliberately rocking the boat. The EU will probably fail to develop a consistent trade policy and end up adapting to the needs of its major member states.

As for the data, it will show further growth in trade volumes. The bad news is that the West will have missed an opportunity to show that free trade, low taxation and lighter regulation is the only winning response to the Chinese challenge.